CAHIER DE RECHERCHE N 14. What beyond oil and gas? Russian trade specialisation in manufactures

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1 Author manuscript, published in "Post Communist Economies 21, 1 (2009) 32 p." LABORATOIRE D ECONOMIE DE LA PRODUCTION ET DE L INTEGRATION INTERNATIONALE UMR 5252 CNRS - UPMF CAHIER DE RECHERCHE N 14 What beyond oil and gas? Russian trade specialisation in manufactures Olga Garanina Juillet 2008 LEPII BP Grenoble CEDEX 9 - France 1221 rue des Résidences Saint Martin d'hères Tél.: + 33 (0) Télécopie : + 33 (0) lepii@upmf-grenoble.fr -

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3 What Beyond Oil and Gas? Russian Trade Specialisation in Manufactures* Olga GARANINA LEPII-CNRS, University of Grenoble Pierre Mendes France Mailing address: LEPII, UPMF- BP GRENOBLE Cedex 9 France Telephone: +33 (0) Fax: 33 (0) olga.garanina@upmf-grenoble.fr Date: July 1, 2008 The author is grateful to Iikka Korhonen, Ville Kaitila and all the participants of the Bank of Finland Institute for Economies in Transition (BOFIT) research seminar Integration of Russia and China into the world economy (Helsinki, December 2007) for helpful comments.

4 Contents ABSTRACT INTRODUCTION DYNAMICS OF RUSSIA S MANUFACTURES TRADE GENERAL TENDENCIES RUSSIA S REVEALED COMPARATIVE ADVANTAGES IN MANUFACTURES DIFFERENTIATION OF SPECIALISATION PATTERNS BY TRADE PARTNERS RUSSIA S TRADE PATTERN: AN OUTLOOK REVEALED COMPARATIVE ADVANTAGE IN BILATERAL TRADE BY RUSSIA'S MAIN TRADING PARTNERS: CIS, EU15, CHINA INTRA-INDUSTRY TRADE DYNAMICS OF EXPORTS AND IMPORTS BY TRADE PARTNER RUSSIA-CIS TRADE RUSSIA - EU15 TRADE RUSSIA - CHINA TRADE CONCLUSION REFERENCES ANNEX

5 Abstract What Beyond Oil and Gas? Russian Trade Specialisation in Manufactures The objective of the paper is to study Russia's pattern of specialisation in the manufactures trade since Russia's global trade balance for manufactures is rapidly deteriorating. However, the trade pattern in manufactures should be differentiated according to Russia s main trading partners: the European Union (EU), the Commonwealth of Independent States (CIS) and China. On the basis of trade indicator analysis (revealed comparative advantages and Grubel-Lloyd index of intraindustry trade), we show that Russia is globally disadvantaged in the manufactures trade vis-à-vis the EU and China, and advantaged in the trade with the within the CIS. Russia is managing to expand its manufactured exports to other CIS countries. However, it is gradually losing its role of main supplier of capital goods in the post- Soviet space. Keywords: international trade, trade specialisation, revealed comparative advantage, intra-industry trade, Russia JEL Classification: F14 3

6 1. Introduction While the transition reforms of the nineties have achieved their principal goals, which are the passage to a market economy and introduction of private property, the economic costs of transition have been very high. Russia experienced a deeper and longer decline than other economies of Eastern Europe. It lost about 40% of its GDP and 50% of its industrial production in , while investments fell by 80%. 1 The recovery started in 1999, but Russia's GDP reached its pre-transition level only in The industrial revival after the crisis of 1998 was based on the effects of the rouble devaluation. It was also backed by the increase in world oil prices. Other authors (Aslund, 2004) have pointed to the progress realised on the path of liberalisation, stabilisation and privatisation, in conformity to Washington consensus prescriptions. In terms of political economy, the recovery can be explained by the emergence of a strong developmental state and the enlargement of the planning horizon of economic actors under the Putin presidency (Garanina, 2007). The favourable price conditions on the world energy markets are contributing to improving the Russian external equilibrium. Several studies have been undertaken in order to analyse the specialisation pattern of Russia in international trade (notably, Ahrend, 2004; Algieri, 2004). Two elements are commonly noted about the Russian foreign trade structure. These are, firstly, its positive trade balance and, secondly, the high level of dependency on hydrocarbon and other primary product exports. This leads us to conclude that there is a vulnerability in the Russian external balance (notably, in the case of the reversal of price conditions on the world energy markets) and about the risks of the "Dutch Disease" 2 and its negative consequences for the domestic manufacturing industries (Ahrend, 2006; Volchkova, 2006; Oomes, Kalcheva, 2007). However, these analyses don't specify the eventual diversification of specialisation patterns depending on the trade partners, which is especially significant for the trade in manufactured products. In this paper, we study specifically Russia's trade flows in manufactures. What is the pattern of diversification of Russia s manufactured exports (and on what geographic basis)? What are the major tendencies for the imports of manufactured products? The manufactures- 1 See Ahrend, Tompson, The "Dutch Disease" (Corden, Neary, 1982; Van Wijnbergen, 1984) describes the situation where the discovery of natural resource deposits in a country has a negative effect on the development of other tradable sectors (notably, manufacturing sectors exposed to international competition). A similar phenomenon can be observed in the case of the increase in the world prices of the natural resource exported by the given country. 4

7 based approach is necessary for understanding the diversification potential of Russian foreign trade and for evaluating the stability potential of the trade balance in case of a major degradation of price conditions on the world energy and primary commodities markets. We show the differentiation of Russia s specialisation patterns according to its main partners, which are the European Union (EU), the Commonwealth of Independent States (CIS) and China. While Russia is globally disadvantaged in manufactures trade vis-à-vis the EU and China, it strives to expand its exports of manufactured products towards the CIS. However, its global trade balance of manufactures is rapidly deteriorating. The second section presents the overview of Russia's manufactures trade. The analysis of the evolution of Russia s global specialisation pattern in manufactures is based on estimates of its revealed comparative advantage (RCA) since The third section analyses the differentiation of trade patterns by Russia's main trade partners based on RCA and intra-industry trade indices. In section four, we study more closely the dynamics of bilateral trade flows with the CIS, the EU15 and China. Section five concludes the paper. 2. Dynamics of Russia s manufactures trade 2.1. General tendencies Being one of the main oil and gas exporters in the world, Russia has a strongly positive trade balance which is influenced by world oil price dynamics. Indeed, Russian exports are dominated by fuels and primary products. In 2006, primary commodities accounted for about 75% of Russia's exports, while manufactured goods 3 constituted less than 20% of its exports. In particular, in 2006, fuels represented about 63% of the total exports and ores and metals constituted about 7% (see Table 1). Moreover, while the share of manufactured exports has been declining, the share of primary commodities in Russia s exports has been steadily growing. The latter can be partially explained by the growth of world hydrocarbon prices, 3 We use the SITC Rev.3 trade classification. Within the SITC, manufactured goods are defined as groups 5 to 8 less 68 (SITC 5: Chemicals and related products, nes, SITC 6: Manufactured goods classified chiefly by materials, SITC 7: Machinery and transport equipment, SITC 8: Miscellaneous manufactured articles, SITC 68: Non-ferrous metals). 5

8 which are causing the value of oil and gas exports to drift upwards, the latter stagnating in volume over the last two years. On the import side, manufactured products dominate, totalling about 75% of the imports in Primary commodities account for about 20%, of which food items constitute 14%. The main changes in imports over the studied period concern the increase in the manufactures share, from 57% to 75% over the studied period. The major contribution to the growth in manufactured imports is being made by increasing imports of machinery and transport equipment, rising from 29% to 44% of Russian imports during Table 1. Structure of Russian foreign trade (percentage of total exports/imports) Exports Imports Total (SITC 0 to 9), USD billion Primary commodities, including fuels (SITC ) All food items (SITC ) Agricultural raw materials (SITC ) Ores and metal (SITC ) Non-ferrous metals (SITC 68) Fuels (SITC 3) Manufactured goods (SITC 5 to 8 less 68) Chemical products (SITC 5) Machinery and transport equipment (SITC 7) Other manufactured goods (SITC less 68) Iron and steel (SITC 67) Textile fibres, yarn, fabrics and clothing (SITC ) Source: UN Comtrade database, SITC Rev. 3. Accessed June While Russia s global trade balance is positive, the situation changes dramatically when looking at the manufactures trade taken in isolation. The Russian trade balance for manufactured goods is negative and the disequilibrium is rapidly increasing despite the considerable growth of manufactured exports since 2002 (see Figure 1). Russian imports of manufactured goods grew by a factor of 5 during the period The negative trade balance reaches about USD 50 billion in 2006, as compared to a zero (or even slightly positive) balance at the end of the 1990s. Thus, Russia is becoming increasingly exposed to the risk of price volatility concerning its main export products (mainly hydrocarbons and metals). On the exports side, a more than 100% growth is not spectacular if we take into account the decrease of industrial production in by a factor of 2, and the fact that the 6

9 Russian GDP reached its pre-transition level only by Thus, the dynamics of manufactured exports roughly reflects the industrial production pattern of the Russian economy. Figure 1. Russian exports and imports of manufactured goods Source: UN Comtrade database. Accessed June The analysis of the evolution of Russian manufactures trade by main product groups (see Table 2) reveals a strong positive dynamic for the export of chemicals and related products (SITC 5), manufactured goods classified chiefly by materials (SITC 6 less 68) and machinery and transport equipment (SITC 7). The latter appears as a highly positive fact. However, on the import side, the growth rates are much stronger, especially for the imports of machinery and transport equipment (SITC 7) and chemicals and related products (SITC 5). 7

10 Table 2. Evolution of the Russian manufactures trade by main product groups (% change as compared to previous year) Exports Chemicals and related products, nes (SITC 5) Manufactured goods classified chiefly by materials (SITC 6 less 68) Machinery and transport equipment (SITC 7) Miscellaneous manufactured articles (SITC 8) Average for manufactured products Average for all products Imports Chemicals and related products, nes (SITC 5) Manufactured goods classified chiefly by materials (SITC 6 less 68) Machinery and transport equipment (SITC 7) Miscellaneous manufactured articles (SITC 8) Average for manufactured products Average for all products Source: UN Comtrade database, SITC Rev. 3. Accessed June A more detailed study of the evolution of the manufactures trade structure is necessary in order to understand the main patterns of change in recent years Russia s revealed comparative advantages in manufactures In the tradition of Balassa (1965), the Revealed Comparative Advantage (RCA) index can be represented as (1): x x ij ik X X j k (1) where x ij /X j is the share of product i in the total exports of country j and x ik /X k share of product i in the total world exports. is the However, the exports-based method of calculation, which was initially justified by the role of import protection measures for the import values, can lead to misunderstanding. For example, is a country effectively specialised in a product i, if it exports the product i, say, 1.5 times more than the world average, but also imports twice more? Thus, the imports value 8

11 should be taken into account. Moreover, in the case of Russia, the results will be strongly influenced by the price dynamics for the major export goods. That is, the increase of hydrocarbons prices may lead to a decrease in the share of manufactures in the total value of exports. Given that, in this study, we use the Normalised Balance index, which can be represented as (2): (X ijk -M ijk )/(X ijk +M ijk ) (2) where X-exports, M-imports, i-product, j, k-trade partners (the whole world). The ratio varies between -1 (the product is not exported, revealed comparative disadvantage) and +1 (the product is exported, revealed comparative advantage). The situation of a close-to-zero result (simultaneous exports and imports of the same commodity by both trade partners) reflects intra-industry trade, which will be analysed later in this paper (see section 3.3). The calculation is based on UN Comtrade statistics (data reported by Russia). The results are presented in Table 3 (see full table in Annex 1). Table 3. Russia's revealed comparative advantages in manufactures 10 product groups with highest RCA index (SITC) product groups with lowest RCA index (SITC) Fertilisers (other than those of group 272) Footwear Organic chemicals Medicinal and pharmaceutical products 67 Iron and steel Office machines and automatic dataprocessing machines 52 Inorganic chemicals Travel goods, handbags and similar containers Leather, leather manufactures, n.e.s., and dressed furskins Cork and wood manufactures (excluding furniture) Articles of apparel and clothing accessories Telecommunications and soundrecording and reproducing apparatus and equipment Non-metallic mineral manufactures, n.e.s Plastics in non-primary forms Power-generating machinery and equipment Machinery specialised for particular industries Photographic apparatus, equipment 79 Other transport equipment and supplies and optical goods, n.e.s.; watches and clocks 62 Rubber manufactures, n.e.s Road vehicles (including air-cushion vehicles) Average RCA for manufactured products Source: UN Comtrade database, SITC Rev. 3, author s calculations. Accessed June

12 As seen in Table 3, Russia s trade performances deteriorate during the studied period. The average RCA declines from 0.13 in 2000 to in Russia is disadvantaged for most of the product groups. Inversely, it is advantaged for eight product groups only (in decreasing order): SITC 56: Fertilisers; SITC 51: Organic chemicals; SITC 67: Iron and steel; SITC 52: Inorganic chemicals; SITC 61: Leather, leather manufactures, n.e.s., and dressed furskins; SITC 63: Cork and wood manufactures (excluding furniture); SITC 66: Non-metallic mineral manufactures, n.e.s.; and SITC 71: Power-generating machinery and equipment. Almost all the above-mentioned groups, except for power-generating machinery, are semi-products. Furthermore, these are energy-intensive goods. That is, the hydrocarbon endowment of the Russian economy and the applied regulatory policies (notably, the regulation of the internal energy market enabling low internal prices of natural gas) contribute to the economics of the energy-intensive industries. Finally, the advantage in technology-intensive power-generating machinery weakens through the studied period, reflecting the decline of the technological potential inherited from the planned economy. However, this picture of Russia s trade specialisation should be differentiated as the trade structure is significantly differentiated depending on the trade partner. 3. Differentiation of specialisation patterns by trade partners 3.1. Russia s trade pattern: an outlook Three large country blocs can be distinguished within the geographical structure of Russian foreign trade: 4 1) The European Union (EU), Russia's main trading partner. The EU15 provide about 40% of Russian foreign trade while the enlarged Union accounts for more than 50% of Russian exports and imports; 2) The Commonwealth of Independent States (CIS), which regroups the former republics of the Soviet Union (except the Baltic countries). In 2006, the CIS accounted for 4 We use the UN Comtrade data unless otherwise stated. 10

13 only about 15% of Russian foreign trade (18.5% in 2000). To compare, in 1991 the part of the CIS in Russian exports was 55% and 58% of the imports. 5 3) China as a growing regional power in Asia. Despite the fact that Russian-Chinese bilateral trade has more than quadrupled since the beginning of the 2000s, in 2006, China absorbed only 5.2% of Russian exports and provided 9.4% of Russian imports. The share of Russia in Chinese imports was 2.2%, and 1.6% in its exports. The high rates of economic growth in both countries and the stabilisation of their political relations explain the strong development potential for their bilateral trade. In the coming sections, we analyse the differentiation of Russia s trade in manufactures. The major problem is the quality of statistical data on Russian foreign trade related to the scope of "grey" imports in Russia. The gap between Russia s and its trading partners statistics is very strong. In particular, Russian imports of manufactured goods seem to be under-valued. However, we observe a gradual improvement of data over the studied period (see Annex 2). Still, Russian-Chinese trade data remains questionable, since in 2006, Russia s manufactured exports to China surpass China s imports from Russia by 1.5 times. In order to overcome this bias, we use the mirror statistics for the analysis of bilateral trade flows. That is, we calculate the average between the data reported by Russia and by its trading partners. 6 Further, we prefer analysing the SITC 2-digit level in order to reduce the errors linked to misclassification. The first results show that Russia s trade pattern in manufactured products is highly differentiated depending on the trading partner (see Figures 2, 3, 4): 1) With other countries in the CIS, Russia has a positive trade balance. Moreover, the balance has been gradually improving since the beginning of the 2000s. Globally, the CIS is the only country group for which Russia is steadily increasing its manufactured exports. 2) The EU accounts for the major part of the Russian negative balance in manufactures. Russian manufactured imports from the EU are rapidly increasing. 3) The manufactures trade balance with China became negative since While we are facing a boom of Chinese exports to Russia, Russian exports are globally stagnating. One should also note a 25% decline in Russian exports in 2006, the exports value passing from USD 4 billion to USD 3 billion. On the other hand, China tripled its manufacturing 5 Interstate Statistical Committee of the CIS, 6 However, as for the Russia-CIS trade, the mirror data is incomplete. In our study we use the aggregate CIS indicator as reported in the UN Comtrade Database, but note that the direct data from Uzbekistan, Tajikistan and Turkmenistan are lacking. Nevertheless, we consider this fact to be a minor problem as these countries are not Russia s major trade partners in the region. 11

14 exports to Russia in the last three years. In consequence, the global trade balance with China has become negative for Russia. Figure 2. Russian exports and imports of manufactured goods towards the CIS Figure 3. Russian exports and imports of manufactured goods towards the EU15 Source: UN Comtrade database, accessed June 2008 Figure 4. Russian exports and imports of manufactured goods towards China Source: UN Comtrade database, accessed June 2008 Source: UN Comtrade database, accessed June

15 3.2. Revealed comparative advantage in bilateral trade by Russia's main trading partners: CIS, EU15, China Traditional theories of international trade explain trade specialisation by pointing to the differential of relative prices, the latter due to differences in labour productivity (Ricardo approach) or in factor endowments (Heckscher-Ohlin theory). In order to define Russia's specialisation pattern, we calculate the indicator of revealed comparative advantage for bilateral trade as it was defined in the preceding section. 7 As shown in Table 4, the structure of revealed comparative advantages is strongly differentiated by main Russia's trading partners (see full tables in Annexes 3-5). Russia appears as relatively advantaged in the trade with the CIS while being disadvantaged in the trade relations with the EU. Thus, Russia can be qualified as an intermediate country in the sense of Lassudrie-Duchêne, Mucchielli (1979). According to these authors, a country may be advantaged in a given product vis-à-vis one trading partner while being disadvantaged concerning the same product in its trade relations with another country or country group. In fact, in the trade with the CIS, Russia possesses revealed comparative advantages for most of the 34 studied product groups. The RCA index is negative only for eight product groups (SITC 84: Articles of apparel and clothing accessories; SITC 73: Metalworking machinery; SITC 85: Footwear; SITC 65: Textile yarn, fabrics, made-up articles, n.e.s., and related products; SITC 82: Furniture, and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings; SITC 52: Inorganic chemicals; SITC 79: Other transport equipment and SITC 67: Iron and steel). On the contrary, in the trade with the EU15, Russia is clearly disadvantaged. In 2006, it demonstrates a positive RCA index for only six product groups (SITC 56: Fertilisers; SITC 52: Inorganic chemicals; SITC 67: Iron and steel; SITC 51: Organic chemicals; SITC 61: Leather, leather manufactures, n.e.s., and dressed furskins; and SITC 66: Non-metallic mineral manufactures, n.e.s.). In the Eastern direction, we observe a degradation of Russia's competitive position towards China. According to the present statistical data, in 2006, Russia has a positive RCA index for seven product groups only. These are SITC 56: Fertilisers; SITC 51: Organic chemicals; SITC 71: Power-generating machinery and equipment; SITC 67: Iron and steel; SITC 64: Paper, paperboard and articles of paper pulp, of paper or of paperboard; SITC 55: Essential oils and resinoids and perfume materials; toilet, polishing and cleansing preparations; and SITC 79: Other transport equipment. 7 That is, (X ijk -M ijk )/(X ijk +M ijk ). X-exports, M-imports, i-product, j, k-trading partners (countries). 13

16 Table 4. RCA index by Russia's main trading partners Russia - CIS trade Russia EU15 trade Russia - China trade product groups with highest RCA index (SITC) 56 Fertilisers (other than Fertilisers (other than those Fertilisers (other than those of group 272) of group 272) those of group 272) Essential oils and resinoids and perfume 55 materials; toilet, polishing and cleansing preparations Inorganic chemicals Organic chemicals Office machines and automatic data-processing Iron and steel Power-generating machinery and equipment machines Medicinal and pharmaceutical products Organic chemicals Iron and steel Leather, leather Paper, paperboard and 51 Organic chemicals manufactures, n.e.s., and dressed furskins articles of paper pulp, of paper or of paperboard Chemical materials and products, n.e.s. Cork and wood manufactures (excluding furniture) Rubber manufactures, n.e.s. Power-generating machinery and equipment Professional, scientific and controlling instruments and apparatus, n.e.s Non-metallic mineral manufactures, n.e.s. Cork and wood manufactures (excluding furniture) Paper, paperboard and articles of paper pulp, of paper or of paperboard Textile yarn, fabrics, madeup articles, n.e.s., and related products Essential oils and resinoids and perfume materials; toilet, polishing and cleansing preparations Other transport equipment Metalworking machinery Plastics in primary forms Other transport equipment Inorganic chemicals product groups with lowest RCA index (SITC) Articles of apparel and Medicinal and Footwear clothing accessories pharmaceutical products Road vehicles (including aircushion vehicles) clothing accessories Articles of apparel and 73 Metalworking machinery Travel goods, handbags 85 Footwear Footwear and similar containers Prefabricated buildings; Textile yarn, fabrics, Travel goods, handbags and sanitary, plumbing, 65 made-up articles, n.e.s., similar containers heating and lighting and related products fixtures and fittings, n.e.s. 82 Furniture, and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings Inorganic chemicals Other transport equipment Office machines and automatic data-processing machines General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. Plastics in non-primary forms 67 Iron and steel Machinery specialised for particular industries Prefabricated buildings; Essential oils and resinoids 81 sanitary, plumbing, and perfume materials; heating and lighting toilet, polishing and fixtures and fittings, n.e.s. cleansing preparations General industrial Prefabricated buildings; 74 machinery and equipment, sanitary, plumbing, heating n.e.s., and machine parts, and lighting fixtures and n.e.s. fittings, n.e.s. Average for manufactured products Average for manufactured products Office machines and automatic data-processing machines Road vehicles (including air-cushion vehicles) Furniture, and parts thereof; bedding, mattresses, mattress supports, cushions and similar stuffed furnishings Plastics in non-primary forms Medicinal and pharmaceutical products Textile yarn, fabrics, made-up articles, n.e.s., and related products Average for manufactured products Source: UN Comtrade database, SITC Rev. 3, author's calculations. Accessed June The grey area shows strong revealed advantages of Russia. 14

17 Furthermore, concerning Russia-EU15 and Russia-China trade, the index is strongly positive (over 0.50) for a very small number of product groups. These are mostly chemicals, fertilisers and iron and steel. Also, we note an advantage in power-generating machinery and equipment in Russian-Chinese trade (however being in decline in 2006). Further, within the Russia-CIS trade, Russia is advantaged in office machines and automatic data-processing machines and in medicinal and pharmaceutical products. On average, Russia s RCA index is slightly improving for the Russia-CIS trade (the average RCA is 0.14 in 2006 as compared to 0.01 in 2000). That is consistent with the increasing positive trade balance of Russia. For the Russia-EU15 and Russia-China relations, we observe the opposite tendency, that is, the decline of the average RCA index in The decline is especially strong for the Russian-Chinese relations, the RCA passing on the negative side (from to -0.59). As for the Russia-EU15 trade, the average RCA is negative while the disadvantage is reinforcing (the RCA decreases from to -0.63). Intra-industry trade analysis is necessary to understand the nature of the trade where the RCA index is close to zero Intra-industry trade A country's foreign trade may be divided into two parts: i) the "equilibrated" part (the intraindustry trade) and ii) the balance, which reflects inter-industry trade. While the latter can be explained by the traditional theories of international trade (comparative advantage), the intraindustry trade reflects the situation of imperfect competition analysed within modern theories of international trade. In order to measure the intra-industry trade, we calculate the Grubel-Lloyd index. The GL index is constructed as follows (3): GL= [{(X ijk + M ijk ) - X ijk - M ijk } / (X ijk + M ijk )] * 100, or GL = [1 - X ijk M ijk / (X ijk + M ijk )] * 100 (3) X exports, M imports, i-product (industry), j, k trading partners. 15

18 The intra-industry trade is therefore defined as the difference between the total trade (Xik + Mik) and the net exports (imports) Xik - Mik, which reflect the intra-industry part of the trade flows. The index varies between 0 (zero intra-industry trade for the industry i) and 100 (all the trade within the industry i is intra-industry). The results show that the intra-industry trade measured by the GL index is relatively stronger for the Russia-CIS trade than for the Russia-EU15 or the Russia-China trade. While the intra-industry trade is relatively stable for the Russia-CIS trade, we note a significant decline within the Russia-EU15 trade during , after a rebound in , which can be explained by the decrease in Russia s imports from the EU15 after the 1998 crisis. Finally, the intra-industry component within Russian-Chinese trade tends to decline, but the 2006 data shows a possibility of a rebound (Table 5). Table 5. Intra-industry trade of manufactured products in Grubel Lloyd index SITC Rev. 3, 2 digit, average weighted by the trade value Russia-CIS Russia-EU Russia-China Source: UN Comtrade database, SITC Rev. 3, author's calculations. Accessed June Within the Russia-CIS trade, the intra-industry trade is relatively more intensive for capital goods and semi-products. In 2006, the intra-industry trade is particularly strong (GL index more than 90%, in declining order) for: SITC 81: Prefabricated buildings; sanitary, plumbing, heating and lighting fixtures and fittings, n.e.s.; SITC 74: General industrial machinery and equipment, n.e.s., and machine parts, n.e.s.; SITC 77: Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof (including non-electrical counterparts, n.e.s., of electrical household-type equipment); SIC 67: Iron and steel; SITC 57: Plastics in primary forms; SITC 64: Paper, paperboard and articles of paper pulp, of paper or of paperboard; SITC 79: Other transport equipment; SITC 72: Machinery specialised for particular industries. The trade of consumption goods plays a limited role in the Russia-CIS intra-industry trade. The dominance of capital goods in intra-industry trade could testify to a reconstitution 16

19 of industrial infrastructures in the CIS space. However, the volumes of manufactured trade remain quite limited. As for the Russia-EU15 trade, the GL index is over 90% only for the group SITC 63: Cork and wood manufactures (excluding furniture). Within the Russian-Chinese trade, the GL index surpasses 90% for SITC 79: Other transport equipment and SITC 73: Metalworking machinery. For both of these groups, we observe a sharp decline in Russian comparative advantages. 4. Dynamics of exports and imports by trade partner 4.1. Russia-CIS trade Table 6 presents the dynamic structure of the Russian trade with the CIS (ranked by the growth ratio 2006 to 1998). First of all, one can note a strong increase in exports for most of the product groups. On average, the exports increased by a factor of 3.6 between 1998 and Among the groups contributing to a considerable part of manufactured exports, we should note the following: The exports of road vehicles (SITC 78) experienced a five-fold increase between 1998 and 2006, contributing to 13.1% of Russian manufactured exports towards the CIS in The exports of road vehicles are mainly composed of motor vehicles for the transport of goods and special-purpose motor vehicles (SITC 782), motor cars and other motor vehicles principally designed for the transport of persons (SITC 781), and parts and accessories of the motor vehicles (SITC 784), which comprise respectively 36.5%, 28.0% and 24.2% of the exports of road vehicles in The exports of lorries (SITC 782) increased in value by a factor of 6.5, and the exports of vehicles (SITC 781) augmented by a factor of 4.7 between 1998 and However, an important part of this dynamic is explained by price factors. So, in 2006, according to the Russian Ministry of Economic Development and Trade (Minekonomrazvitia, 2007), Russian automobile exports towards the CIS increased in value by 21.4% for cars and by 43.4% for lorries. Measured in quantities, the exports of cars increased only by 3.7%, while the exports of lorries increased by 17.9%. The exports of iron and steel have increased in value by a factor of 5, reaching 18.5% of the value of Russian manufactured exports towards the CIS in However, the rapid 17

20 increase of Chinese steel production and the growth of internal energy prices in Russia could render the competition in this sector more acute. Machinery exports accounted for about 23% of Russian manufactured exports to the CIS in The growth rates are close to or less than the average for all manufactured products, but are still significant (ranging from a 2 to 3.5-times increase between 1998 and 2006 depending on the product group). The main items in the Russian machinery exports towards the CIS are SITC 71: Power generating machinery and equipment; SITC 74: General industrial machinery and equipment; SITC 77: Electrical machinery, apparatus and appliances; SITC 79: Other transport equipment and SITC 72: Machinery specialised for particular industries. Each of them contributes about 4-6% of Russia s manufactured exports towards the CIS. The fact of continued growth in machinery exports lets us suggest a gradual reconstitution of economic (and also political) ties in the post-soviet space. In fact, the exports of industrial equipment could provide the basis for the restoration of strong and durable links between the productive structures of the CIS countries under the Russian leadership. However, Russia hasn't succeeded in maintaining its role as the main supplier of machinery and transport equipment for the post-soviet space. Russia s largest CIS partners, Belarus, Ukraine and Kazakhstan, reported an increase between 2000 and 2006 in imports of machinery and transport equipment (SITC 7) by 3.2; 5.3; and 5.3 times respectively. At the same time, the share of Russia in total imports of machinery and transport equipment (SITC 7) declined from 44% to 28% for Belarus, from 33% to 20% for Ukraine and from 38% to 22% for Kazakhstan. 8 That means that Russia is gradually losing its role as the principal supplier of machinery and transport equipment for the CIS. Further, the scope of economic partnership within the CIS is limited by its political disintegration. On the imports side, the value of manufactured imports increased by a factor of 2.5 in 2006 as compared to The imports of transport vehicles and equipment registered a strong increase. The imports of SITC 79: Other transport equipment have increased by a factor of 7.3 in 2006 as compared to 1998, reaching 7.6% of Russian manufactured imports from the CIS in However, the imports of SITC 78: Road vehicles (which account for about 10% of imports) have grown more slowly. In 2006, the imports of road vehicles constituted about 2.2 times the value of imports of A particularly strong increase in imports occurs in In absolute terms, according to the Russian Ministry of Economic Development and Trade 8 UN Comtrade, data reported by Belarus, Ukraine and Kazakhstan, SITC Rev.2. Accessed October

21 (Minekonomrazvitia, 2007), in 2006, the imports of cars (in physical quantities) increased by 82.7% and imports of lorries augmented by 7.1%. SITC 67: Iron and steel is dominant in imports of manufactured products (28% of manufactured imports in 2006, increase in value by 3.3 times in 2006 as compared to 1998). The part of machinery in manufactured imports from the CIS is comparable to the Russian exports structure (SITC 74: General industrial machinery and equipment, nes, and parts of, nes comprises 6.9% of manufactured imports in 2006; SITC 77: Electric machinery, apparatus and appliances accounts for 6.8%; SITC 72: Machinery specialised for particular industries constitutes 4.5%; and SITC 71: Power generating machinery and equipment 3.6%). However, the growth rates are slightly more moderate than for the exports. 19

22 Table 6. Evolution of Russian trade with CIS by product groups, 1998=100% Russian exports to the CIS (SITC Rev 3 product groups) Share of Russian imports from the CIS (SITC Rev.3 manuf product groups) exports Essential oils and resinoids and perfume materials; toilet, polishing and cleansing preparations Plastics in non-primary forms Furniture, and parts thereof; bedding, 82 mattresses, mattress supports, cushions and similar stuffed furnishings Other transport equipment Fertilisers (other than those of group 272) Plastics in primary forms Travel goods, handbags and similar Paper, paperboard and articles of paper pulp, containers of paper or of paperboard Cork and wood manufactures (excluding furniture) Miscellaneous manufactured articles, n.e.s Plastics in non-primary forms Iron and steel Non-metallic mineral manufactures, n.e.s Manufactures of metals, n.e.s Prefabricated buildings; sanitary, plumbing, heating and lighting fixtures and fittings, n.e.s General industrial machinery and equipment, n.e.s., and machine parts, n.e.s. Share of manuf imports Iron and steel Cork and wood manufactures (excluding 63 furniture) Road vehicles (including air-cushion vehicles) Machinery specialised for particular industries Electrical machinery, apparatus and 57 Plastics in primary forms appliances, n.e.s., and electrical parts thereof 77 (including non-electrical counterparts, n.e.s., of electrical household-type equipment) Miscellaneous manufactured articles, n.e.s Non-metallic mineral manufactures, n.e.s Manufactures of metals, n.e.s Metalworking machinery Electrical machinery, apparatus and appliances, n.e.s., and electrical parts 77 thereof (including non-electrical counterparts, n.e.s., of electrical householdtype equipment) Road vehicles (including air-cushion vehicles) Essential oils and resinoids and perfume Machinery specialised for particular materials; toilet, polishing and cleansing industries preparations Professional, scientific and controlling Travel goods, handbags and similar instruments and apparatus, n.e.s. containers Paper, paperboard and articles of paper pulp, of paper or of paperboard General industrial machinery and equipment, n.e.s., and machine parts, n.e.s Professional, scientific and controlling instruments and apparatus, n.e.s Inorganic chemicals Medicinal and pharmaceutical products Articles of apparel and clothing accessories Leather, leather manufactures, n.e.s., and dressed furskins Prefabricated buildings; sanitary, plumbing, heating and lighting fixtures and fittings, n.e.s Organic chemicals Furniture, and parts thereof; bedding, 82 mattresses, mattress supports, cushions and similar stuffed furnishings 79 Other transport equipment Power-generating machinery and equipment Power-generating machinery and equipment Textile yarn, fabrics, made-up articles, n.e.s., 65 and related products Articles of apparel and clothing accessories Organic chemicals Rubber manufactures, n.e.s Leather, leather manufactures, n.e.s., and 61 dressed furskins Photographic apparatus, equipment and 59 Chemical materials and products, n.e.s supplies and optical goods, n.e.s.; watches and clocks Textile yarn, fabrics, made-up articles, n.e.s., and related products Chemical materials and products, n.e.s Metalworking machinery Telecommunications and sound-recording 76 and reproducing apparatus and equipment Dyeing, tanning and colouring materials Rubber manufactures, n.e.s Inorganic chemicals Dyeing, tanning and colouring materials Photographic apparatus, equipment and supplies and optical goods, n.e.s.; watches and clocks Medicinal and pharmaceutical products Telecommunications and sound-recording and reproducing apparatus and equipment Footwear Office machines and automatic dataprocessing machines processing machines Office machines and automatic data Footwear Fertilisers (other than those of group 272) Average for manufactured products Average for manufactured products Source : UN Comtrade Database, SITC Rev.3, author s calculations. Accessed June

23 4.2. Russia - EU15 trade The structure of the Russian exports of manufactured products towards the EU15 (see Table 7) is clearly oriented towards goods in the first stages of processing: SITC 67: Iron and steel provides about 38% of manufacturing exports in 2006 (that is, the increase in value by a factor of 4.6 in 2006 as compared to 1998); Another important group is composed of chemicals and fertilisers (SITC 51: Organic chemicals account for 10.7% of manufactured exports in 2006; SITC 52: Inorganic chemicals for 9.1% and SITC 56: Fertilisers for 4.7%); Finally, SITC 66: Non-metallic mineral manufactures provide about 13% of Russian manufactured exports to the EU15 in On the import side, the growth was relatively more significant than for the exports. On average, the manufactured imports from the EU15 increased by a factor of 3.6 in 2006 as compared to 1998, while the exports increased by only 2.6 times during the same period. Machinery stands for about 30% of the Russian manufactured imports from the EU15. Notably, the main imported products in this group are SITC 74: General industrial machinery and equipment (10.2% of manufactured imports in 2006), SITC 72: Machinery specialised for particular industries (9.2% in 2006), SITC 77: Electric machinery, apparatus and appliances (7% of manufactured imports in 2006). The growth rates are close to or inferior to the average growth rates of the manufactured imports from the EU15. The imports of other final products and consumption products demonstrate very high growth rates. The imports of SITC 78: Road vehicles registered a spectacular increase (7- fold during the analysed period), reaching approximately 14% of the total manufactured imports from the EU15. Further, SITC 76: Telecommunications, sound recording and reproducing equipment accounts for 6.4% of manufactured imports (increase by a factor of 4.5). SITC 54: Medicinal and pharmaceutical products accounts for 6.5% of manufactured imports in 2006 (increase by a factor of 5.5 in 2006 as compared to 1998). The rapid growth of imports of final products testifies to the poor competitiveness of Russian domestic producers, who fail to compete effectively with imports. 21

24 Table 7. Evolution of Russian trade with the EU15 by product groups, 1998=100% Russian exports to EU Share of manuf exports 2006 Russian imports from EU Rubber manufactures, n.e.s Road vehicles (including air-cushion vehicles) Plastics in non-primary forms Plastics in primary forms Telecommunications and sound-recording 76 and reproducing apparatus and equipment Metalworking machinery Prefabricated buildings; sanitary, 81 plumbing, heating and lighting fixtures and Medicinal and pharmaceutical products fittings, n.e.s. 61 Leather, leather manufactures, n.e.s., and dressed furskins Travel goods, handbags and similar containers Iron and steel Rubber manufactures, n.e.s Organic chemicals Office machines and automatic dataprocessing machines Furniture, and parts thereof; bedding, 82 mattresses, mattress supports, cushions and similar stuffed furnishings Telecommunications and sound-recording and 76 reproducing apparatus and equipment Essential oils and resinoids and perfume 55 materials; toilet, polishing and cleansing preparations Dyeing, tanning and colouring materials Dyeing, tanning and colouring materials Other transport equipment Electrical machinery, apparatus and appliances, n.e.s., and electrical parts 77 thereof (including non-electrical counterparts, n.e.s., of electrical household-type equipment) Inorganic chemicals Office machines and automatic dataprocessing machines Iron and steel Professional, scientific and controlling General industrial machinery and equipment, instruments and apparatus, n.e.s. n.e.s., and machine parts, n.e.s Cork and wood manufactures (excluding furniture) Articles of apparel and clothing accessories Fertilisers (other than those of group 272) Fertilisers (other than those of group 272) Essential oils and resinoids and perfume 69 Manufactures of metals, n.e.s materials; toilet, polishing and cleansing preparations Machinery specialised for particular industries Power-generating machinery and equipment Inorganic chemicals Machinery specialised for particular industries Paper, paperboard and articles of paper pulp, of paper or of paperboard Plastics in non-primary forms Power-generating machinery and equipment Manufactures of metals, n.e.s Photographic apparatus, equipment and supplies and optical goods, n.e.s.; watches and clocks Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof (including non-electrical counterparts, n.e.s., of electrical household-type equipment) Paper, paperboard and articles of paper pulp, of paper or of paperboard Share of manuf import s Travel goods, handbags and similar containers Non-metallic mineral manufactures, n.e.s Chemical materials and products, n.e.s Textile yarn, fabrics, made-up articles, n.e.s., and related products Organic chemicals General industrial machinery and 74 equipment, n.e.s., and machine parts, Non-metallic mineral manufactures, n.e.s n.e.s. 59 Chemical materials and products, n.e.s Professional, scientific and controlling 87 instruments and apparatus, n.e.s Plastics in primary forms Prefabricated buildings; sanitary, plumbing, 81 heating and lighting fixtures and fittings, n.e.s Photographic apparatus, equipment and 79 Other transport equipment supplies and optical goods, n.e.s.; watches and clocks Miscellaneous manufactured articles, n.e.s Miscellaneous manufactured articles, n.e.s Metalworking machinery Textile yarn, fabrics, made-up articles, n.e.s., 65 and related products Road vehicles (including air-cushion Cork and wood manufactures (excluding vehicles) furniture) Footwear Leather, leather manufactures, n.e.s., and 61 dressed furskins Furniture, and parts thereof; bedding, Articles of apparel and clothing mattresses, mattress supports, cushions and accessories similar stuffed furnishings Medicinal and pharmaceutical products Footwear Average for manufactured products Average for manufactured products Source : UN Comtrade Database, SITC Rev.3, author s calculations. Accessed June